Friday, March 27th, 2020
KiwiSaver investors are panicking and changing their funds from Balanced or Growth funds to Conservative. Their motivation is to reduce losses. However, the outcome will likely be the opposite. What these people fail to understand is that there is a big difference between a loss and a drop in value.
KiwiSaver funds are made up of units. The value of the fund is the number of units multiplied by the price per unit. Underlying each unit is a set of investments in each of the four asset classes – cash, fixed interest, property and shares. Units in Balanced and Growth funds have a much higher weighting towards property and shares than units in a Conservative fund. When a KiwiSaver investment is switched from a Balanced or Growth fund to a Conservative fund, there is in effect a sale of property and share investments and a purchase of fixed interest investments.
When a Balanced or Growth unit that has fallen in price is sold, a drop in value becomes a loss. If the money is withdrawn, then the loss is permanent. If the money is used to buy Conservative units, then the investor is purchasing units that are more stable in value. This means that when the share market starts to rise again, the investor will miss out on gains. The investor loses twice. There is a loss on the sale of units and a loss of future gains.
Putting all this in simple terms, whatever happens to the value of a fund, the number of units held is not affected. Investors should not sell their units when prices are low. It will only be a matter of time until prices rise again. If you were in the right fund before COVID-19, this fund should still be the right one for you.
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